Berkshire Hathaway yesterday announced a new manager for investments. This manager has run a hedge fund since 1999, and his returns is over 1236% since early 2000 through the first quarter of 2011. That’s a stunning 27%/year return when the market has been basically flat-to-down.
(update on the above returns: another article said $100 invested at inception on January 14, 2000 was worth $1,134 at the end of August 2011 net of all fees. That’s still an amazing 23.5%/year in a flat market)
Here’s a link to a Fortune article about him.
What is particularly interesting to me is that this person has made money as a stock picker with a concentrated portfolio (currently only has 11 stocks in $2 billion portfolio).
Why is this interesting? So many people these days seem to view gold and commodities as the only way to make money. Even value investors are lamenting the death of securities analysis; complaining that analysis doesn’t matter anymore as all stocks go up and down together based on the greed and fear of the day. Many value investor letters spend most of their time talking about macroeconomic factors.
(They say things like, “We used to ignore macro factors and focus on bottom up analysis. After 2009, we learned that this is a mistake…”. One reason this proved a mistake for some is that they owned the likes of AIG, LEH, BSC, WM that basically went to zero. Their post-mortem was something like, “Things got a lot worse than we thought”. I think that is the wrong conclusion. The correct post-mortem is that they picked the wrong stocks. They picked companies that were highly leveraged with low quality assets in a bad economic environment. You can’t predict economic environments, but you can assess balance sheet quality. This is where they went wrong. It was a micro or bottom up analysis error, not a top down economic analysis error. As proof, despite the worst crisis since the great depression, JPM came through without a single quarterly loss. You don’t hear Buffett complaining about poor performance because “things got quite a bit worse than we thought…”. The job of an investor, CEO etc… is to see that things won’t go to zero even when things get worse than anyone thinks!)
In other words, everyone has turned into either a gold bug and/or a macro-trader ala George Soros. Value investors that choose to sit out the market for fear of sovereign default somewhere or another financial crisis think they can optimize the timing of their reentry into the market (which proved oftentimes not to be the case in early 2009).
Even one well respected manager that really stuck to the philosophy of buying and holding a concentrated portfolio of well-researched stocks decided to diversify more after his losses in 2008-2009.
This financial crisis has really changed the approach of many investors.
Anyway, having said all that, it is very refreshing and encouraging to hear that there are people that will stick to their guns, stick to what works and not be shaken out of a proven methodology just because of a couple of bad years.